NISM Certifications · NISM-Series-VI: Depository Operations

Depository and its Business Partners: formula sheet

Full chapter guide

Key formulas

Depository definition: Depository = institution holding securities in electronic form and effecting transfer by book entry; Registered with SEBI under the Depositories Act, 1996. It works through Depository Participants.
Bank vs depository: what is held: Bank holds money; depository holds securities; A bank lends deposits and pays interest. A depository does not lend or invest your securities.
Demat and remat: Demat: physical → electronic; Remat: electronic → physical; Do not reverse them. Both are done through the DP.
Transfer mechanism: Transfer = debit in seller's account + credit in buyer's account; This is a book entry. No certificate or transfer deed is needed.
Access route: Investor → DP → Depository; The investor is not a direct customer of the depository.
Depository and DP relationship: Investor → Depository Participant (DP) → Depository (NSDL or CDSL); You hold an account with the DP. The DP is the depository's agent and connects you to the depository.
Exchange link: NSDL ↔ NSE (promoter link) | CDSL ↔ BSE (promoter link); Use this to answer promoter questions. Both depositories serve all exchanges, so settlement is not limited to the linked exchange.
First depository: NSDL = first depository in India; CDSL = second; A common one-line question. Do not reverse it.
Governing law: Depositories Act, 1996 + SEBI (Depositories and Participants) Regulations; Both depositories are registered with SEBI and regulated under this framework.
DP status: DP = SEBI-registered intermediary + agreement with depository, acting as the depository's agent; Both the SEBI certificate and the depository agreement are needed. Having only one is not enough.
Who deals with whom: Investor (BO) ↔ DP ↔ Depository; The BO deals with the DP. The depository deals with the DP. The depository does not normally deal with the BO directly.
Eligible entity types (examples): Bank, public financial institution, financial institution, custodian, stock broker / clearing member, NBFC, R&T agent, and other categories permitted by the regulations; A company qualifies only if it falls in a permitted category. The entity must also meet SEBI's net worth and other conditions. Check the current workbook for exact amounts.
Number of depositories: One DP can register with more than one depository; A DP can offer both NSDL and CDSL accounts. Each demat account sits with one depository through one DP.
Issuer and depository: Issuer ↔ Depository: agreement to admit securities for demat; Without this, an investor cannot hold that security in demat form.
Tripartite arrangement: Issuer + RTA + Depository: tripartite agreement; Used when the issuer appoints an RTA to keep its records and process demat requests.
Role of RTA: RTA = maintains holder records + processes demat/remat requests + handles transfers for the issuer; The RTA acts for the issuer, not for the investor or the DP.
Role of clearing corporation: Clearing corporation = determines obligations + settles trades + guarantees settlement; It receives securities in pay-in and gives them out in pay-out through its depository accounts.
Clearing member: Clearing member = member of clearing corporation settling for itself and clients; It holds a demat account with a DP for settlement.
Flow of a trade: Exchange (trade) → Clearing corporation (obligation) → Depository (securities move); Use this order to answer sequence questions.
Legal basis: Depositories Act, 1996 = law for demat holding and book-entry transfer; Enacted by Parliament. It is the parent law for depositories in India.
Regulations: SEBI (Depositories and Participants) Regulations, 2018; Made by SEBI. They govern depositories, DPs and related conduct.
Two owners: Depository = registered owner; Investor = beneficial owner; Voting and economic benefits belong to the beneficial owner. The depository does not have the right to vote or benefits of the securities.
Rule hierarchy: Act → SEBI Regulations → Bye-laws → Business rules; Lower rules cannot conflict with the higher ones.
Approval of rules: Depository makes bye-laws and business rules → SEBI approves; Changes also need SEBI's approval before they apply.
Oversight chain: SEBI → Depository → DP → Beneficial owner; Each level monitors the next.

Quick revision

A depository holds securities in electronic form and transfers them by book entry.
Dematerialisation converts physical certificates into electronic holdings. Rematerialisation does the reverse.
India has two depositories: NSDL and CDSL.
The investor reaches a depository only through a DP.
A DP acts as the agent of the depository and offers its services to investors.
The beneficial owner is the investor who has the economic interest in the securities; the depository is the registered owner in the issuer's records.
An investor opens a demat account with a DP by signing an agreement with it.
A DP enters into an agreement with the depository to become a participant.
An issuer or its registrar signs an agreement with the depository to admit its securities.
The Depositories Act and SEBI regulations decide who may act as a depository or DP.
Learn each party's role first, then the rule that governs it.
Check whether the question asks for the depository, the DP or the issuer before choosing an option.

Common mistakes

Saying the depository deals directly with investors. Fix: Remember the chain: investor, DP, depository. You open your account with a DP.
Thinking a depository lends securities like a bank lends money. Fix: A depository only holds and transfers securities. It does not lend or invest them. Ownership stays with you.
Saying CDSL was the first depository in India. Fix: Remember that NSDL started first. The age of the exchange does not decide the order of the depositories.
Thinking an investor opens an account directly with NSDL or CDSL. Fix: You open the demat account with a DP. The depository only holds records through its DPs.
Thinking an investor can open a demat account directly with NSDL or CDSL Fix: Remember the chain: investor, DP, depository. The account is opened through a DP.
Treating the DP as the owner or registered holder of the investor's securities Fix: The BO is the beneficial owner and holds the beneficial interest. The depository is the registered owner in the issuer's records, but in name only. It has no voting rights or beneficial interest (Depositories Act, 1996, Section 10). The DP is only an agent and service provider.
Saying the investor signs an agreement with the issuer to enter the depository. Fix: The issuer's agreement is with the depository. The investor's agreement is with the DP when opening an account.
Treating the RTA as the investor's agent. Fix: The RTA is appointed by the issuer and acts for the issuer.
Saying the depository is the beneficial owner of the securities. Fix: The depository is the registered owner on the issuer's books. The investor is the beneficial owner and enjoys the rights and benefits.
Thinking bye-laws and business rules are made by SEBI. Fix: The depository frames them. SEBI approves them.

Exam tips

Expect direct definition questions. Learn the one-line definitions of depository, DP, demat and remat word for word.
Bank versus depository comparisons are common. Use the money versus securities test and watch for options that give the depository a lending role.
Questions may ask you to pick the benefit or the problem. Read whether the question says 'NOT' or 'EXCEPT' before choosing.
Negative marking applies in this paper at 25% of the marks for a question, so skip only if you cannot remove at least two options.
Know that NSDL and CDSL are the two depositories and that investors reach them through DPs.
Memorise the pair: NSDL as first and NSE-linked, CDSL as BSE-linked. Most promoter questions reduce to this.
In 'who deals with the investor' questions, the answer is the Depository Participant.
Watch for options that give a depository a trading, broking or advisory role. These are almost always wrong.